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Fall in remittances may hit consumer spending, tax targets
June, 21st 2016

It is time economic planners in Kerala reflect on the serious impact of sharp fall in remittances on future consumer spending and tax collection in the State. Being the biggest receiver of remittances (40 per cent) among States, Kerala has traditionally had the highest consumer spending.

Studies have estimated that the actual collection from commodity taxes is 30 per cent less than potential, resulting in high revenue deficits. In this context, recent sharp fall in remittances can have an adverse impact on future consumer spending and tax potential.

Lower share
Already, laxity in own tax effort has resulted in Kerala having a revenue deficit at 2.44 per cent of GSDP when all States average was 0.4 per cent during 2013-14. The higher per capita income has meant that Kerala gets a lower tax share from the Finance Commission awards.

These make it imperative for it to find innovative methods to stimulate economic growth by tapping non-budgetary sources and thus expanding the resource potential. Though there could be a case for expenditure efficiency, fiscal correction for Kerala cannot be solely expenditure-led, says R Mohan, researcher and fiscal analyst.

Development expenditure
Cutting down on development expenditure is not – neither it should be – the way to achieve it, Mohan adds. But RBI statistics point to how States have violated this paradigm in their frantic attempts to control revenue expenditure.

For 2013-14, the latest year for which actual figures are available, slashing of expenditure and failure to mobilise Own Tax Revenue at all States-level (as compared with Revised Estimates) are quite marked. The revenue deficit was contained at 0.4 per cent of GSDP (2.44 per cent in the case of Kerala) largely through slashing of expenditure.

Own tax revenue
Barring Karnataka, the actual Own Tax Revenue receipts of every State has been below the revised estimate, points out Mohan.

Also noteworthy is that the ratios of high- and middle-income States such as Maharashtra, Punjab, Andhra Pradesh, Kerala, Tamil Nadu and West Bengal have been below that of all-States average.

But low-income States such as Bihar, Madhya Pradesh and Odisha have shown a higher ratio, indicating a better tax effort.

On the expenditure side, the cuts have been sharper for low-income States and the actual figures have been almost near revised estimates for Kerala.

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